We've come to that point in the rally where indices had gotten overbought- (1 month ago).. Moved sideways.. and now are breaking back out to new highs, with SPX, NDX, DJIA all moving to new highs of the year, with DJIA exceeding mild trendlines to suggest this moves BACK to new all-time highs sooner than later- Whereas many had picked spots to sell into this bounce from mid-February, the fact that indices have ignored any warning signs and pushed higher, led by a strong breadth rally and improving participation is important- Multiple DJIA stocks like GS, CAT, AAPL, XOM, JNJ and CVX are all breaking out above key trendlines, while Sector ETF's like XLE, XLF and XLB have all made notable breakouts themselves with others waiting in the wings just fractionally under key levels, such as XLK, XLY, XLI and XLV - Given that many breadth indicators had Exceeded last Nov/Dec highs OVER a month ago, while prices had not accomplished this feat, and STILL lie fractionally under these levels in an environment where sentiment was less than optimistic, the reasons for rallies were pretty simple, and had little to do with earnings, or China, or even Crude oil, despite the impressive positive correlation in the last few months. Trendsimproving with good participation and above-average breadth are always more important than most other factors, particularly in an environment where the economy remains on uneven footing,, and arguably still very much in recovery mode. Bottom line, breadth and momentum have lessened a bit in recent weeks, though that's not sufficient means to sell into this move, as breakouts in many Sector ETFs should help prices to accelerate a bit quicker than they have in recent weeks, and will help many of these oscillators to begin to improve. For now, given that many have been far more defensive than was necessary during this nearly 300 point S&P rally off the lows, many will be now forced to chase this move as indices start to breakout in the US and show steady recovery in both Europe and Asia- A few charts below to point out why its necessary to have a bulllish stance, despite how far stocks have moved already in the last two months:
Percentage of stocks trading above their 50, 150, 200 day MA gave some early positive signals in late February, but only now has the Percentage of stocks trading above the 200--day MA reached levels seen last SPRING at the highs, just over 60%. An early positive sign which should have been heeded by many
Breakout in the Advance/decline was also "telling" back in March, as this gauge, along with things like the McClellan Oscillator and Summation index, rose over November 2015 highs very quickly in the period from late February into early March while indices were still very much below. This was yet another sign of breadth beginning to spike at a much faster rate than many people expected.
DJIA also has managed to breakout above a mild downtrend formed by last year's All-time highs, which has also been seen in the S&P Mid-cap Index and Small-cap indices, while in relative terms, the MID has exceeded key trends vs SPY that give this market another dose of real strength. While momentum as shown by MACD is negative at current levels, much of this is due to the slowdown in the last few weeks which helped to alleviate overbought conditions, but at the same time, caused a stallout which now is not helping momentum FOLLOW this recent push to new highs. Given that prices on indices and sectors are breaking out across the board, this is less of a troublesome sign in the near-term.
A peaking out in Defensive leadership is also an important step in the process and was largely absent during much of the first month of Rally in the indices off the lows. just in the last week we've seen evidence of Utilities and now Consumer Staples, shown above, lessening their momentum and relatively dropping vs the SPX which technically is viewed as a positive for equities.
This chart above might be one of the more important, given the relative breakout of the Financial sector, which has been under an immense amount of pressure, and now this week's earnings have spurred on many stocks to rise to new weekly if not monthly highs. Given the combination of both prior RELATIVE lows being recouped, ALONG with downtrends being exceeded, this tends to be a powerful near-term combination that can allow for further near-term outperformance in this sector, which is precisely what has happened over the last couple days. This is important given the representation of Financials within the SPX, and should help this group show better relative strength over the next few weeks. Again, a significant tailwind likely for stocks.
All in all, enough is there to support a move back to new highs, as the multiple breakouts are not being accompanied (yet) by a surge in optimism, which will only help the market to climb further up the wall of worry. Given the amount of underperformance this year until now by hedge funds and huge amounts of outflows we've seen in the equity markets with % Cash holdings nearly as high as we've seen since 08, it looks like Equities have further to go.. On the Upside ..